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September 20, 2011

IMF Downgrades U.S. Economic Outlook

Global economy enters 'dangerous new phase'

The International Monetary Fund lowered its outlook for the U.S. in a report released Tuesday and said that the world economy has entered a "dangerous new phase" as the recovery had weakened. Projections for both the U.S. and Europe were gloomy, with even the lower numbers requiring improvement from the current rate of growth to be met.

The report said that both sluggish growth and a protracted job recovery were making the U.S. economy struggle. Poor consumer and business sentiment combined with a weak housing market and problems in household finances added up to substantial downside risk.

The report advocated both debt reduction and stimulus spending simultaneously, and warned that if the former did not occur through "bold political commitment" a "sudden collapse of market confidence … could seriously disrupt global stability." The latter would, it added, "partly cushion private activity" during a "sluggish transition from public to private demand."

The report also stressed the importance of implementing the Dodd-Frank Act to "minimize risks to financial stability from a prolonged period of low interest rates."

The report also warned of the serious consequences to a failure to take action. "Downside risks to the U.S. outlook have significantly increased," it said. "Growth will suffer if the temporary payroll tax cuts and increased unemployment insurance are not continued into 2012. Also, failure to reach political consensus on the design of debt reduction by this fall will result in more front-loaded deficit cuts than currently assumed, with attendant negative effects on growth. More fundamentally, delays in accomplishing an adequate medium term debt-reduction plan could suddenly induce an increase in the U.S. risk premium, with major global ramifications."

The IMF lowered its growth projections for the U.S. from the previous figures of 2.5% for 2011 and 2.7% for 2012, made in June, to1.5% in 2011 and 1.7% in 2012—but the economy would have to do better than it is now just to meet those